Pricing Issues • Pricing Strategies – Everyday Low Pricing (EDLP) Vs Hi-Lo Pricing • How Should Prices Be Set? – Demand Oriented Pricing • How Do Retailers Set Price? – Cost Oriented Pricing • Legal Issues in Pricing PPT 15-2
Pricing Strategies • Everyday Low Prices (EDLP) – Charge the same price all the time – Set prices between regular non-sale price and deep discount sale prices of a high/low pricing competitor. – EDLP retailers typically still have some sales.
• High/Low Pricing – Regular prices are higher than EDLP competitors, but merchandise frequently on sale at lower prices.
PPT 15-3
Methods for Setting Price
• Demand-Oriented – Charge as much a customers are willing to pay • Cost-Oriented – Set price at a fixed percent over cost of merchandise • Competitor-Oriented – Set price in relation to competitor’s prices
PPT 15-4
Maintained Markup % and Gross Margin Maintained = Sold Margin
• Markdowns (Sales) • Discounts to employees • Inventory shrinkage due to shoplifting and employee theft
PPT 15-6
Setting Retail Price Based on Cost • Determine – Cost of Goods Sold – Planned and Forecasted Reductions – Desired Maintained Markup
• Calculate Initial Markup % Based on Cost of Goods Sold, Planned and Forecasted Reductions, and Desired Maintained Markup • Calculate Initial Retail Price Based on Cost of Merchandise and Initial Markup Percent PPT 15-7
Setting Prices Based on Demand – Price Customer Is Willing to Pay • Estimate Sales Made at Different Price Levels • Calculate Profit at Each Price Level • Set Prices to Maximize Profits
PPT 15-10
Methods for Estimating Sales at Different Price Levels • Analyze Historical Sales and Prices Using Statistical Methods • Conduct Price Experiments • Use Judgment
PPT 15-11
Breakeven Analysis Understanding the Implication of Fixed and Variable Cost Contribution/Unit
Breakeven point
Fixed Costs Unit Sales Calculating Breakeven Quantity BEP quantity PPT 15-12
Reasons for Taking Markdowns • Get Rid of Slow-Moving, Obsolete, Uncompetitively Priced Merchandise • Increase Sales and Profits through Price Discrimination • Generate Cash to Buy Better Selling Merchandise • Increase Traffic Flow and Sale of Complementary Products Generate Excitement through a Sale PPT 15-14
Types of Price Discrimination • First Degree – Set unique price for each customer equal to customer’s willingness to pay – Auctions
• Second Degree – Offer the same price schedule to all customers – Quantity discounts
• Third Degree – Charge different groups different prices – Markdowns Late in Season – Early Bird Special – Seniors Discounts – Over Weekend Travel Discount – Coupons PPT 15-15
How To Reduce Markdowns • Use Markdown Optimization Models • Improve Sales Forecasts and Merchandise Budget Plan • Work with Vendors to Plan Deliveries
PPT 15-16
Coupons • Documents that entitle the holder to a reduced price or X cents off a product or service. • Purpose – Reduce price to price sensitive customers who will spend the effort to clip coupons – Induce customer to try products for first time – Convert first time users to regulars – Encourage large purchases – Increase usage – Protect market share PPT 15-17
Rebates • Money returned to the customer based on a portion of the purchase price. • Retailers’ perspective: more advantageous than coupons since they increase demand, but retailer has no handling costs. • Manufacturers like rebates because: – Many customers don’t redeem. – They can offer price cuts to customers directly.
PPT 15-18
Price Bundling and Multiple-unit Pricing Price Bundling: practice of offering two or more different products or services at one price. Multiple-unit pricing: similar to price bundling except products or services are similar rather than different.
PPT 15-19
Variable Pricing • Application of price discrimination – By location – zone pricing – Early Bird Special – Seniors Discounts – Over Weekend Travel Discount – Quantity Discount
• Electronic channel has potential for charging a different price to each customer PPT 15-20
Pricing and the Internet
• Auction pricing more feasible – easier to form a market of buyers and sellers (eBay) • Priceline.com
PPT 15-21
Leader Pricing • Certain items are priced lower than normal to increase customers traffic flow and/or boost sales of complementary products. • Best items: purchased frequently, primarily by price-sensitive shoppers. • Examples: bread, eggs, milk, disposable diapers.
PPT 15-22
Price Lining • A limited number of predetermined price points. • Ex: $59.99 (good), $89.99 (better), and 129.99 (best) • Benefits: – Eliminates confusion of many prices. – Merchandising task is simplified. – Gives buyers flexibility. – Can get customers to “trade up.”
PPT 15-23
Odd Pricing • A price that ends in an odd number ($.57)or just under a round number ($98). • Retailers believe practices increases sales, but probably doesn’t. • Does delineate: – Type of store (downscale store might use it.) – Sale
• Horizontal Price Fixing • Comparative Price Advertising • Bait and Switch Tactics • Scanned Versus Posted Prices PPT 15-25
Vertical Price Fixing Vertical Price Fixing -- Agreements to fix prices between parties at different levels of the same marketing channel. • Vendors can’t force retailers to sell at manufacturer suggested retail price (MSRP). • Retailers can sell above MSRP. • Often vendors tie selling products are MSRP with co-op advertising allowance PPT 15-26
Predatory Pricing • Establishing merchandise prices to drive competition from the marketplace. • Illegal! • Retailers can charge different prices at different locations if costs are different.